Nvidia (NVDA)

Leading designer of graphics chips Nvidia (NASDAQ:NVDA) reported Q4 CY2024 results topping the market’s revenue expectations, with sales up 77.9% year on year to $39.33 billion. Guidance for next quarter’s revenue was optimistic at $43 billion at the midpoint, 2.1% above analysts’ estimates. Its non-GAAP profit of $0.89 per share was 5.2% above analysts’ consensus estimates.

Company Overview

Founded in 1993 by Jensen Huang and two former Sun Microsystems engineers, Nvidia (NASDAQ:NVDA) is a leading fabless designer of chips used in gaming, PCs, data centers, automotive, and a variety of end markets.

Chips need to keep getting smaller in order to advance on Moore’s law, and that is proving increasingly more complicated and expensive to achieve with time. That has caused most digital chip makers to become “fabless” designers, rather than manufacturers, instead relying on contracted foundries like TSMC to manufacture their designs. This has benefitted the digital chip makers’ free cash flow margins, as exiting the manufacturing business has removed large cash expenses from their business models. Read More. The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. Digital chips derive their processing power from the number of transistors that can be packed on an individual chip. In chip design, nanometers or “nm” refers to the length of a transistor gate – the smaller the gate the more processing power that can be packed into a given space. In 1965, Intel’s founder Gordon Moore famously predicted a doubling of transistors on a chip every two years. The concept, known as Moore’s Law, was based on his belief that the technology used to create semiconductors would improve continuously, allowing chips to become ever smaller and ever more powerful.

A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Luckily, Nvidia’s sales grew at an incredible 64.2% compounded annual growth rate over the last five years. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers, a great starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Nvidia’s annualized revenue growth of 120% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, Nvidia reported magnificent year-on-year revenue growth of 77.9%, and its $39.33 billion of revenue beat Wall Street’s estimates by 2.6%. Despite the beat, this was its third consecutive quarter of decelerating growth, potentially indicating that the current upcycle is losing a bit of steam. Company management is currently guiding for a 65.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 50.9% over the next 12 months, a deceleration versus the last two years. Still, this projection is eye-popping given its scale and implies the market is forecasting success for its products and services.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Nvidia’s DIO came in at 86, which is 18 days below its five-year average. These numbers show that despite the recent increase, there’s no indication of an excessive inventory buildup.

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Nvidia’s gross margin is one of the best in the semiconductor sector, and its differentiated products give it strong pricing power. As you can see below, it averaged an elite 74.3% gross margin over the last two years. That means Nvidia only paid its suppliers $25.73 for every $100 in revenue.

Nvidia produced a 73% gross profit margin in Q4, down 2.9 percentage points year on year. On a wider time horizon, however, Nvidia’s full-year margin has been trending up over the past 12 months, increasing by 2.3 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Nvidia has been a well-oiled machine over the last two years. It demonstrated elite profitability for a semiconductor business, boasting an average operating margin of 59.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Nvidia’s operating margin rose by 35.2 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, Nvidia generated an operating profit margin of 61.1%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Nvidia’s EPS grew at an astounding 83.3% compounded annual growth rate over the last five years, higher than its 64.2% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Nvidia’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Nvidia’s operating margin was flat this quarter but expanded by 35.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q4, Nvidia reported EPS at $0.89, up from $0.52 in the same quarter last year. This print beat analysts’ estimates by 5.2%. Over the next 12 months, Wall Street expects Nvidia’s full-year EPS of $2.99 to grow 45.7%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Nvidia has shown terrific cash profitability, and if sustainable, puts it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the semiconductor sector, averaging an eye-popping 45.9% over the last two years.

Taking a step back, we can see that Nvidia’s margin expanded by 18.5 percentage points over the last five years. This is encouraging because it gives the company more optionality.

Nvidia’s free cash flow clocked in at $15.52 billion in Q4, equivalent to a 39.5% margin. The company’s cash profitability regressed as it was 11.4 percentage points lower than in the same quarter last year, but we wouldn’t read too much into it because capital expenditures can be seasonal and companies often stockpile inventory in anticipation of higher demand, leading to quarter-to-quarter swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Nvidia’s five-year average ROIC was 39%, placing it among the best semiconductor companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Big corporations like Nvidia are attractive to many investors in times of instability thanks to their fortress balance sheets that buffer pockets of soft demand.

Nvidia has an eye-popping $43.21 billion of cash on its balance sheet (that's no typo) compared to $8.46 billion of debt. This $34.75 billion net cash position is 1.2% of its market cap and shockingly larger than the value of most public companies, giving it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Nvidia beat analysts’ revenue, EPS, and adjusted operating income expectations this quarter. We were also glad next quarter's revenue guidance topped Wall Street’s estimates. On the other hand, its inventory levels increased materially. Still, this quarter had some key positives and the stock remained flat at $130.65 immediately following the results.

Zooming out, investors are likely breathing a sigh of relief as many were afraid that some combination of DeepSeek's emergence and rumors surrounding weaker demand for Microsoft's cloud offerings would negatively impact results. These fears were reflected in Nvidia's options contract pricing going into the print, which implied a 10%+ move in either direction. 

Updated: May 21, 2025 at 10:17 PM EDT

Before investing in or passing on Nvidia, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Nvidia is truly a cream-of-the-crop semiconductor company. For starters, its revenue growth was exceptional over the last five years. On top of that, its admirable gross margins indicate robust pricing power, and its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

Nvidia’s P/E ratio based on the next 12 months is 30.1x. Looking at the semiconductor space today, Nvidia’s qualities as one of the best businesses really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $163.00 on the company (compared to the current share price of $131.17), implying they see 24.3% upside in buying Nvidia in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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